Firm Expelled for Mis-Classifying Liabilities to Inflate Net Capital
FINRA expelled a broker-dealer for re-classifying certain liabilities as assets, thereby illegally inflating its net capital. The principals were also barred from the industry. FINRA alleges that the firm tried to structure compensation as an asset by characterizing the payments as forgivable loans. FINRA claims that much of the compensation had already been earned or that repayment was highly unlikely given the terms of the notes. FINRA alleges that the firm tried to enhance its capital condition in order to conceal a deteriorating financial condition. The inflated financials resulted in misleading FOCUS reports and net capital and books and records violations.
OUR TAKE: Broker-dealers sometimes make the mistake that regulatory accounting (for FINRA net capital) is the same as GAAP accounting. What may pass muster as an asset under GAAP may not for FINRA purposes.
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